Monetary Policy Cannot Solve the Problems Facing Our Economy

Sep142012

Recent disappointing economic indicators have led the Federal Reserve to take additional extraordinary monetary actions to support the anemic recovery. On Thursday, September 13, 2012, the Federal Open Market Committee (FOMC) announced a third round of large?scale asset purchases, known as quantitative easing, amounting to $40 billion per month. The FOMC also extended its pledge to keep short?term interest rates near zero through at least mid?2015, and reconfirmed its asset maturity extension program, known as Operation Twist, will continue through the end of 2012. The employment portion of the Federal Reserve’s dual mandate for full employment and price stability has motivated the FOMC to take a series of extraordinary monetary actions over the four years since the height of the financial crisis.

But despite Federal Reserve’s best attempts, it has fallen short in its quest for more jobs. A dismal Employment Report released on Friday, September 7, 2012, found just 96,000 payroll jobs were created in August and the unemployment rate has remained above eight percent for 43 consecutive months. While the unemployment rate has declined from its October 2009 peak of 10.0%, the decline has been driven by declining labor force participation, not job creation. Job creation remains anemic, and labor forceparticipation has slumped to its lowest level since September 1981. The Federal Reserve’s actions will likely prove ineffective because monetary policy cannot solve the problems facing the anemic economy recovery. Liquidity is high, and interest rates are low. America’s businesses are not sidelined because monetary policy hasn’t done enough; rather, they are sidelined because uncertainty over budget, regulatory, and tax policies is as high as it has ever been in Washington.

Naturally, the question arises as to whether the new round of monetary accommodation will provide much benefit to the economy. The consensus among economists and market watchers is that it will do little good, while increasing the risk of harmful price inflation in the future.